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Friday, 30 January 2015

Apple

Basic Trading Concepts Defined

With the largest cap value in the market of $628.42 billion, NASDAQ-listed Apple is known as the most valued company in the world, far ahead of the next two most valued companies – Exxon Mobil ($388.31 billion) and Microsoft ($378.47 billion). (Figures stated are as of January 2015).

The 7:1 stock split in June 2014 managed to bring down its stock market price by a factor of 7 (from $645.57 to $92.22), while keeping the overall company valuations unchanged. (For related reading, see: How To Profit From Stock Splits And Buybacks).Though the split made the stock price relatively affordable for small investors, the price -- hovering in the range of $107 -- is still considered expensive by many small and workaday investors. High-priced stocks are often perceived as over-valued, with little or no room for further appreciation, while low-priced stocks are seen to have more growth potential (hence investors tend to go after penny stocks). Stock splits generate more liquidity due to low prices, which leads to more market participation, which includes small investors. (For related reading, see: The Lowdown On Penny Stocks).

Apple's post-stock-split performance

Although the Modigliani-Miller (M&M) Theorem states that businesses don’t create any additional value just by reorganizing their corporate equity structure (such as a stock split), historical data confirms that splitting a stock does have a positive impact on stock price. WSJ provides the following data about stock performance being better in the long run, subsequent to a split:

Source: WSJ.com

Challenges in trading Apple stock

Even after the stock split by a factor of 7, the price above $100 makes it difficult to attract common investors (psychological price barriers). But there are other ways to trade Apple through low-cost options.

To maintain a base case for comparison, assume that an investor has $2,000. He can therefore purchase 20 Apple shares, assuming the price is $100. Let’s keep the price target of $135 on long positions (35% profit) and $80 on the downside (20% loss).

Trade Apple stock through options and option combinations

Options trading not only allows a lot of flexibility to match the stock trades at a fraction of the cost, but also enables investors to create different combinations with varying returns to suit their risk appetite. (For related reading, see: Measuring And Managing Investment Risk).